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Oil Market to Remain Jumpy

Kiplinger's latest forecast on the direction of energy prices

By  JIM PATTERSON , Managing Editor  November 5, 2018

By JIM PATTERSON, Managing Editor
November 5, 2018

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Iran sanctions? What sanctions? Today, the Trump administration’s sanctions on Iran’s oil energy officially kick in. But oil prices are off substantially from a few weeks ago, when traders were betting that the loss of Iranian crude exports would send prices zooming. Benchmark U.S. crude recently traded at about $64 per barrel, versus $75 last month.

Production is perking up in other countries, assuaging the market’s fears about possible shortages. Saudi Arabia has vowed to compensate for lost Iranian exports, and output in the United States keeps pushing higher. At the same time, the outlook for the global economy has dimmed a bit, suggesting that the world will need less crude oil than previously anticipated.

We expect the market to remain volatile, but for oil prices to trade between $65 and $70 per barrel early next year – not far from where they are now. The loss of Iranian crude is significant, but production boosts elsewhere should just about make up the difference.

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Drivers in the United States are enjoying cheaper gasoline. The national average price of regular unleaded dropped to $2.76, down six cents from a week ago. Odds are prices will keep declining this fall. Diesel, now averaging $3.27 per gallon, is off a penny from last week and may edge down a bit more.

Natural gas prices are suddenly rallying on signs of colder weather coming next week. The benchmark gas futures contract surged by more than 7%, trading at $3.53 per million British thermal units. Gas traders are betting that the combination of cold weather in the forecast and below-normal levels of gas held in storage will lead to still-higher prices. But we’re skeptical the rally can last. Although gas stockpiles are low, the industry is replenishing them. And daily gas production keeps setting new records. So, while a sustained cold snap would strain gas supplies, any warm-up in the weather ought to bring prices back down. Government weather forecasters aren’t calling for a colder-than-normal winter for any region of the United States — one reason not to bet heavily on higher gas prices just yet.

Source: Department of Energy, Price Statistics

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